Off-Balance Sheet Financing Vehicles – Restructuring Problems
Off-balance Sheet Financing Vehicles – Restructuring Problems
When something collapses, there are always some things to blame on; and for the financial crisis erupted August 2007, people blamed it on off-balance sheet financing vehicles. Special purpose entities (SPEs), structured investment vehicles (SIVs), or variable interest entities (VIE) are different terms used for “off-balance sheet financing” practices that banks had used to hide their debts until the recent market meltdown. This paper will briefly discuss the genuine problem causing the collapse in financial system, what actions have been taken by the policy makers, and whether or not those actions will work. 1. The rise and fall of SIVs Even though question for the paper is about what actions have been taken, not about what was the root of the problem, I still think it is necessary to understand the problem to determine whether or not those actions are sufficient enough to address the problem. After only two decades of its origin in 1988, SIVs quickly earned it share and grew until it accounted for roughly 5% of the U.S corporate debt market which was equivalent to above than $400 billion in assets by 2009 (Ehrlich, 2009). That was because SIVs helps banks gain profits (from the difference between short-term cost of financing and longer-term returns from investments) and extent lending; and at the same time help bank ‘hide’ their leverage assets as it was allowed to not being reported in the balance sheet (Ehrlich, 2008). It is important to notice that SIV assets was initially created for high-quality assets that are highly liquid and have low credit risk. With overwhelming expansion of the SIVs that led to increasing demand for SIV assets, subprime mortgages started to be employed widely regardless of their unpredictable risk (Ehrlich, Anandarajan, & Chou, 2009). That was against the rule of a SIV and was called as “bad lending practice by banks” by U.S treasury Secretary Paulson.
When something collapses, there are always some things to blame on; and for the financial crisis erupted August 2007, people blamed it on off-balance sheet financing vehicles. Special purpose entities (SPEs), structured investment vehicles (SIVs), or variable interest entities (VIE) are different terms used for “off-balance sheet financing” practices that banks had used to hide their debts until the recent market meltdown. This paper will briefly discuss the genuine problem causing the collapse in financial system, what actions have been taken by the policy makers, and whether or not those actions will work. 1. The rise and fall of SIVs Even though question for the paper is about what actions have been taken, not about what was the root of the problem, I still think it is necessary to understand the problem to determine whether or not those actions are sufficient enough to address the problem. After only two decades of its origin in 1988, SIVs quickly earned it share and grew until it accounted for roughly 5% of the U.S corporate debt market which was equivalent to above than $400 billion in assets by 2009 (Ehrlich, 2009). That was because SIVs helps banks gain profits (from the difference between short-term cost of financing and longer-term returns from investments) and extent lending; and at the same time help bank ‘hide’ their leverage assets as it was allowed to not being reported in the balance sheet (Ehrlich, 2008). It is important to notice that SIV assets was initially created for high-quality assets that are highly liquid and have low credit risk. With overwhelming expansion of the SIVs that led to increasing demand for SIV assets, subprime mortgages started to be employed widely regardless of their unpredictable risk (Ehrlich, Anandarajan, & Chou, 2009). That was against the rule of a SIV and was called as “bad lending practice by banks” by U.S treasury Secretary Paulson.
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